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Failure to prevent economic crime: a crime in the making?

· British Prime Minister David Cameron has announced plans to consult on a corporate offence of "failure to prevent economic crime";

· "Economic crime" is likely to be broadly defined to include offences such as fraud, theft, false accounting, forgery, destroying company documents, money laundering, handling the proceeds of crime, etc, plus a range of offences under the Financial Services and Markets Act 2000;

· If implemented, the new offence is likely to resemble section 7 of the UK Bribery Act 2010 by making companies criminally liable for acts of their "associated persons". Associated persons are likely to be defined as anyone who provides services for or on behalf of the company, anywhere in the world e.g. employees, subsidiaries, agents, intermediaries and contractors, joint venture partners, etc;

· It is expected that the legislation will have extra-territorial effect and will apply to crimes committed by an associated person anywhere in the world. It is also likely that the legislation will apply to any company that is incorporated in the UK or any company that conducts business, or part of a business, in the UK (e.g. via a subsidiary, sales operations, a representative office or even simply as a result of a listing on the London Stock Exchange);

· If the legislation mirrors the Bribery Act, the only defence will be for a company to show that, at the time of the crime, it had in place "adequate procedures" that were designed to prevent such conduct;

· Companies will need to undertake a detailed risk assessment, design comprehensive policies and procedures and implement a tailored compliance programme. Such a programme will inevitably need to include demonstrable board level engagement, training, due diligence and monitoring. The compliance burden will be high and early preparation and planning will be essential.

Background

If a new corporate offence of failing to prevent economic crime is introduced in the UK, it will represent a huge expansion in corporate criminal liability and impose a very significant compliance burden on companies, especially if the law has extra-territorial effect. Whilst many have described the Bribery Act as the new "gold standard" for anti-corruption legislation globally, the current proposals are both pioneering and ambitious. As laudable as the proposals may be, such trailblazing may leave many companies reeling unless the consultation process eliminates some of the obvious practical difficulties and compliance issues that will be associated with such a wide-ranging change in the law.

At present, a company can only be found liable for fraud and other economic crimes in the UK if it can be proved that persons at executive or board level (for legal purposes, the "directing mind" of the company) were complicit in the criminality. Establishing such involvement is usually difficult, particularly in large corporations where responsibilities are divided between many individuals and the chain of knowledge may break long before it reaches senior management. Regulators have therefore struggled to attribute liability to corporate entities and some companies have become complacent or turned a blind eye in relation to illegal behaviour within their organisation.

In 2014, the Director of the Serious Fraud Office, David Green QC, called for the creation of a corporate offence of failing to prevent economic crime, to mirror the provisions of the Bribery Act. The government appeared to be considering this proposal before the announcement was made in September 2015 that Ministers had shelved it, apparently on the grounds that there had not yet been any successful prosecutions under section 7 of the Bribery Act. This has of course now changed following a number of guilty pleas and the first Deferred Prosecution Agreement relating to bribery in November 2015.

It is not yet clear what might constitute "economic crime" for the purpose of the new offence. Based upon views previously expressed by David Green QC, it is possible that the definition will be based upon the offences in relation to which a Deferred Prosecution Agreement can be obtained, as set out in Schedule 17 of the Crime and Courts Act 2013. This is a very broad list which includes fraud, theft, forgery, false accounting, destroying company documents and a range of offences under the Financial Services and Markets Act 2000, the Proceeds of Crime Act 2002, the Companies Act 2006 and the Fraud Act 2006 (plus of course the Bribery Act).

It is likely that any new offence of failing to prevent economic crime will be modelled on section 7 of the Bribery Act. This provides that a company will be guilty of a criminal offence where an associated person commits bribery, unless the company can prove that it had "adequate procedures" in place to prevent such conduct. An "associated person" will include an employee or agent, or indeed, anyone who provides services for or on behalf of the company anywhere in the world.

Under the Bribery Act, a company will only have a defence to the section 7 offence if it can show that it had in place "adequate procedures" that were "designed to prevent" bribery by associated persons. It is likely that any new offence concerned with failure to prevent economic crime will benefit from the same defence. The UK Ministry of Justice has published official guidance setting out six key principles that a company should have in mind when designing and implementing an appropriate compliance programme for the purposes of section 7: (1) a detailed risk assessment; (2) policies and procedures that are proportionate to the risks identified; (3) demonstrable Board level commitment and 'tone from the top'; (4) the need for due diligence in relation to third parties; (5) communication and training; and (6) monitoring and review. These key principles are intended to be illustrative, not prescriptive. Indeed, the guidance specifically emphasises the need for an approach that is tailored to the company's individual circumstances. As a result, companies are entitled to take a proportionate, "risk-based" approach to their compliance programme for the purposes of section 7. We would expect a similar approach to be adopted in relation to the proposed new offence.

Comment

The proposed offence will be of significant interest to all companies with a nexus to the UK. Companies are likely to be made liable for the acts of their associated persons, wherever in the world they commit economic crime. For large organisations, this is likely to include considerable numbers of subsidiaries, employees and agents in numerous jurisdictions, some of whom may be difficult to oversee. Companies found guilty of an offence will inevitably be at risk of unlimited fines, disgorgement and a range of ancillary legal and regulatory sanctions. The risks, consequences and related compliance burden are therefore potentially very significant.

The proposed new offence will in many ways be a "quick win" for David Cameron, who it seems is determined to implement a number of anti-corruption and transparency initiatives as one of the key legacies of his premiership. However, the merits of the new offence will need to be weighed against the compliance burden upon companies. The new legislation will inevitably result in substantial costs, management resource and associated administration at a time when, in reality, many companies are still struggling with their obligations under the Bribery Act. A broad definition of "economic crime" will only add to the burden.

Speaking at the "Tackling Corruption Together" conference on 11th May 2016 - a civil society, business and government precursor to the global leaders' anti-corruption summit on 12th May - Geoff Healy (Chief External Affairs Officer at BHP Billiton) observed that regulators are now imposing such stringent penalties on companies who fall short of the required standards that many companies with a strong compliance culture and framework are simply electing not to do business in certain parts of the world. In their absence, there is of course a risk that less reputable companies, or companies who are not subject to the provisions of the legislation, might exploit these opportunities. In contrast, Cobus De Swardt (Managing Director at Transparency International) issued a powerful call to governments not to "water down" any anti-corruption proposals at the global leaders' summit.

It will therefore be interesting to see whether any new legislation, when it reaches the statute books, is as tough as the rhetoric surrounding the issue. Whilst the primary legislation is likely to be drafted in accessible and straightforward terms (like the Bribery Act), it is expected that the new offence will be accompanied by extensive guidance as to what might constitute "adequate procedures", hopefully recognising the practical realities and compliance burden that it will place on companies. By contrast, it is to be noted that the proposed new offence of failing to prevent tax evasion (see above) refers to the need for "reasonable procedures" which is considered to constitute a lower threshold for compliance. Whether or not this wording will be adopted in relation to a new offence of failing to prevent economic crime is not known.

A further point which will need to be clarified through the consultation process is whether, as with section 7, there will be a requirement for the associated person to commit the crime with the intention of "obtaining or retaining business, or an advantage in the conduct of business" for the company. This may create a number of practical issues in relation to the broad range of offences referred to above, particularly money laundering. Indeed, it is to be noted that the proposed new offence of failure to prevent the facilitation of tax evasion by associated persons, whilst largely modelled on section 7, has dropped the requirement for an intention to benefit the company. In circumstances where not all "economic crimes" sit easily within the section 7 model, careful consideration will have to be given to the drafting of the proposed new offence.

However, bearing in mind the global mood and various associated international initiatives in relation to matters such as corruption, tax evasion and money laundering[1], it is considered likely that the proposed new offence will be enacted into law in one form or another. As a result, and because of an increasing focus on compliance generally, early efforts to identify a company's economic crime risks are unlikely to be wasted. Indeed, recent research suggests that whilst many companies have sought to implement policies and procedures in response to the Bribery Act, a significant proportion still struggle to achieve compliance a full five years after the Act was introduced. The consequence is that those policies and procedures are unlikely to be considered "adequate" for the purposes of section 7 and therefore that the defence will be unavailable. The lesson is to be prepared and not to wait until the legislation is passed.

The output from the anti-corruption summit shows that real change is afoot and David Cameron's message is clear: "You have been warned".

Simon Airey, Francesca Ingram and Joshua Domb[2] from the Corporate Crime, Investigations & Compliance team in DLA Piper's London Office attended the Conference on 11th May at the invitation of the Commonwealth Enterprise Investment Council.

[1]e.g. legislation such as the U.S. Foreign Account Tax Compliance Act, the introduction of the Common Reporting Standard (which provides for automatic exchange of tax information between almost 100 countries), recent EU plans to force the world's biggest multinationals to report their earnings in each EU member state, proposals relating to public registers of beneficial ownership of trusts and companies, the EU Fourth Money Laundering Directive, etc.